Arizona, Mexico, NAFTA: Long Courtship, Marriage of Convenience, and Now Looming Separation?

Arizona, Mexico, NAFTA: Long Courtship, Marriage of Convenience, and Now Looming Separation?
August 09, 2017
Vera Pavlakovich-Kochi, Ph.D., Senior Regional Scientist and Associate Professor of Geography and Regional Development

Life in the U.S.-Mexico borderlands has traditionally been, in words of the University of Arizona historian Oscar Martinez, one of conflict and accommodation [1]. It has always been influenced by decisions, or lack of them, in the respective capitals, Washington and Mexico City. In the early days a major complaint of “borderlanders” was that national decision-makers were not only far away, but more importantly, disinterested in the region’s remoteness, above-average poverty, and other obstacles that the international boundary presented to residents of the border region. In the absence of national-level interest, borderlanders developed their own coping strategies to deal with scarcities of goods, uneven distribution of job opportunities, and long established familial ties on both sides of the border. One of the geographically most pronounced expressions of regionally specific developments was the emergence of border twin cities, which in more or less informal ways established crossborder exchanges of goods and people, and over time wove a deep interdependence into their economic and social fabrics.

Beginnings of a Formal Framework 

One of the first national-level “interventions” in the economies of the border region was the Bracero program. Faced with a shortage of agricultural labor during WWII, the U.S. government enacted a guest worker program allowing temporary immigration of Mexican residents to work in fields in California, Arizona, Texas, and about twenty other states. As the need for migrant labor diminished over time, the program was abolished in 1964 leaving a large number of Mexicans in, mostly border states, without jobs. The resulting high unemployment in Mexican border states was one, although not the main reason for the next bi-national economic intervention known as the Maquiladora program introduced in 1965.

The Maquiladora program was specifically “Mexican” in name only, but otherwise known as “production-sharing” or “off-shore production,” a wide-spread practice of (mostly) U.S. manufacturing companies, through which low cost labor in less developed countries was used for assembly procedures contributing to overall lower production costs of final products. Taiwan, South Korea, and Singapore were among first to allow foreign capital investments into assembly plants for the purpose of exporting the assembled products back to the parent company in a foreign country. In a simplified production-sharing model, the parent company was a clear beneficiary; the low-wage regions praised the new way of globalizing production-sharing practices for job creation, whereas the more or less gradual loss of manufacturing production jobs in the U.S. was assumed to be offset by new jobs in more skill demanding final manufacturing processes, including design, marketing, and logistics of delivering final products to markets.

In the early Maquiladora program, the Mexican government allowed U.S. companies to invest in the establishment of assembly plants in a narrow border zone with specific provisions under which U.S. components were imported duty free, but after being assembled had to be exported back to the U.S. Aside from the initial investment, the parent company was obliged to pay only for value added in Mexico, which basically consisted of wages, utilities, and other operation-related services. On the U.S. side, the arrangement was matched by specific provisions in the Harmonized Tariff System allowing for duty free re-import of U.S. manufactured components assembled in Mexico.

During three decades from the time the first maquila plants were opened up in Nogales, Sonora, and Ciudad Juarez, Chihuahua, in 1965 to the signing of NAFTA at the end of 1993, the maquiladora sector in Mexico not only mushroomed in all border states, but eventually spread across the entire country. Measured in number of manufacturing jobs the employment in maquiladora plants contributed significantly to the industrialization of Mexico’s economy, especially in border states. Increases in U.S.-Mexico trade in electronics, electric appliances, transportation and medical products was largely attributed to a growing crossborder integration in North American manufacturing sector within the maquiladora framework.

The Dawn of NAFTA

Writing at the dawn of the North American Free Trade Agreement (NAFTA) with deepest understanding of economic, political, and cultural complexities of U.S.-Mexico relationships, economist and foreign service officer Sidney Weintruab concluded that a free trade agreement was not only imminent, but at the time, the best of available solutions. In his seminal book, Marriage of Convenience, he presented the intellectual foundations for NAFTA arguing that the economies of the U.S. and Mexico were already highly integrated and that a policy of “managed integration” would allow each nation to extract maximum advantages from the integration[2].

As a trade agreement, NAFTA was designed to manage all aspects of doing business within North America involving crossborder exchanges of goods, money, and services, but not people.  The six basic rules included elimination of tariffs on manufactured and agricultural products, removal of non-tariff barriers, safeguards for crossborder investments, intellectual property provisions, rules of origin, and government procurement. Under NAFTA the benefits enjoyed by the maquiladora establishments would eventually be granted to all export-oriented manufacturers in Mexico, including export-oriented services[3]. Unlike early maquiladoras, the production-sharing operations under NAFTA were granted considerable access to the Mexican market. Outside of the maquiladora framework, the removal of import tariffs especially benefited U.S. manufacturers of heavy equipment and exporters of agricultural products to Mexican markets. 

Early on, the implementation of NAFTA coincided with a forty percent devaluation of Mexican peso, thus making Mexican labor even cheaper, which many economists, such as Jesus Cañas and Roberto Coronado of the Federal Reserve Bank of Dallas, considered the main reason for a big boost in maquiladora employment through the 1990s[4]. As a border state, and with an economy based on less traditional manufacturing than the “rust belt,” Arizona benefited from the expansion of the maquiladora sector, and approached NAFTA with positive expectations. After all, NAFTA appeared to basically sanction economic relationships that the State had already developed with Mexico, especially with the neighboring Mexican state of Sonora. Arizona was already home to a number of parent companies with maquiladoras south of the border, and did not suffer from “job exportation” to Mexico as did, for example, manufacturing industries in Ohio, Pennsylvania, or Michigan. Aside from increased exports to Mexico, Arizona anticipated additional benefits from marketing its proximity to Mexico to companies interested in establishing or supplying maquila plants across the border.

Moreover, Arizona and Sonora already had in place a formal institution — sister organizations Arizona-Mexico Commission and Comisión Sonora-Arizona —  with binational committees that met twice a year to formally discuss matters of trade, manufacturing and maquiladoras, agribusiness, finance, border ports infrastructure, tourism, education, and cultural cooperation. Under the auspices of the two Commissions and in partnership with Arizona universities and the (then) Thunderbird School of Management, for the first time in history a series of truly binational reports was produced examining existing state of crossborder economic integration with recommendations for further improvements within the NAFTA framework.  A prevailing atmosphere in Arizona in favor of NAFTA was based on long traditional economic relationships, and was also vividly influenced by ideas about borderless economies advocated by popular Japanese organizational theorist Kenichi Ohmae[5].

Major Challenges to the NAFTA Framework

Not fully a decade in place, the NAFTA framework  was challenged by two major events: China’s entrance into World Trade Organization (WTO) and the 9/11 terrorist attacks on the U.S. soil in 2001. The first caused shock waves which hit the maquiladora sector in Mexico hard almost eliminating the textile sector and seriously affecting all other manufacturing sectors by offering even lower labor costs. The maquiladora sector eventually recovered partially due to Mexico’s decisive shift towards building higher labor skills in its workforce through a multitude of government-supported technological institutes that focused on technical and engineering degrees, commonly in collaboration with industry representatives to match specific maquiladora needs. At the same time, many U.S. companies re-evaluated the importance of physical proximity of Mexico’s locations versus trans-Pacific ones. The concept of “near-shoring” encompasses return of Mexico as the most favorable location inciting some companies to relocate their Asia-based operations back to Mexico. As efforts to safeguard national borders became a national priority in the post-9/11 era, it became clear that not only the vision of economic borderlessness was killed, but that crossborder trade flows were profoundly affected by new and more stringent border crossing regulations. It was soon realized that the more complex border crossing procedures and increased wait times encouraged maquiladora suppliers, for whom just-in-time delivery was crucial, to locate in Mexico in proximity of maquiladoras thus creating multilayer supply chain complexes surrounding the maquiladoras.

With increasing availability of technical and engineering skills in Mexico, comparable manufacturing jobs in Arizona’s parent companies for the first time have faced direct competition from Mexico. Yet the trade data show Arizona’s growing exports to Mexico suggesting that eventual losses in some segments are being compensated in gains in other areas. One of such bright spots is the automotive industry; although Arizona lies outside the North American “auto-alley,” exports in automotive parts to Mexico have significantly increased in last several years, thanks mainly to the Ford Company in Sonora.

Arizona and Sonora Transborder Mega-Region Concept Revivified

Numerous studies, including university prepared background reports for several Arizona Town Halls, emphasized the importance of Arizona’s trade with Mexico, and especially the high degree of economic interdependence between the economies of Arizona and Sonora[6]. The newly revived concept of Arizona and Sonora as a transborder mega-region is based on the realization that both states benefit through collaboration in sharing physical assets, production, and labor skills[7]. So far, evidence suggests that Weintraub’s idea of “a marriage of convenience” has worked well for Arizona.  However, as internal and external circumstances change, continuous adjustments are necessary to make the system more efficient and more beneficial for both sides. It is also true that since NAFTA was first implemented myriad of developments, some dramatic, have transformed the border region. Yet, it is also clear that in a highly complex and interdependent economic relationship any drastic change on either side would certainly cause significant shocks and disruption throughout the entire system.  A sudden divorce proposed (again) by a faraway power center, and based on unsubstantiated allegations of betrayal and unfairness, should sensibly be out of question even if there may not be much love in the relationship.

References:

[1] Martinez, Oscar J., Troublesome Border. University of Arizona Press, 2006. (Revised Edition)

[2] Weintraub, SidneyA Marriage of Convenience: Relations between Mexico and the United States. A Twentieth Century Fund Report. Oxford University Press, 1990.

[3] In 2006, maquiladora industry was combined with car assembly plants and other export-oriented manufacturers and services in the IMMEX Program (Industria Manufacturera, Maquiladora  y Servicios de Exportación).

[4] Cañas, Jesus and Roberto Coronado, “Maquiladora industry: past, present and future,” Business Frontier, Federal Reserve Bank of Dallas, 2002.  

[5] Ohmae, KenichiThe Borderless World: Power and Strategy in the International Economy. Harper Business, 1990.

[6] “Arizona and Mexico,” 2016; “Arizona as a Border State: Competing in the Global Economy,” 2005. Arizona Town Hall.

[7] Gibson, Lay J. et al. ”Sun Corridor’ as a Transborder Mega-Region: Revivifying Economic Development in the Arizona-Sonora Region,” Studies in Regional Science, Vol.46, No.1, 2016.